Algo Steel Ltd. is a well-established company in the steel manufacturing sector, successfully operating for the past 20 years. The existing capital…

Annual Depreciation = (24,00,000 - 2,40,000) / 4 = 5,40,000 Tax Saving on Depreciation = Depreciation × Tax Rate 1,35,000 = 5,40,000 x Tax Rate Tax Rate = 25% (i) Average Rate of Return (ARR) Statement of Profit after Tax Particulars Year 1 (₹) Year 2 (₹) Year 3 (₹) Year 4 (₹) Cash flow before dep. & tax 12,00,000 20,00,000 18,00,000 16,00,000 Less: Depreciation 5,40,000 5,40,000 5,40,000 5,40,000 Profit before tax 6,60,000 14,60,000 12,60,000 10,60,000 Less: Tax @ 25% 1,65,000 3,65,000 3,15,000 2,65,000 Profit after tax (PAT) 4,95,000 10,95,000 9,45,000 7,95,000 Average Rate of Return (ARR) = Average annual net income (PAT) / Average Investment Total PAT = 4,95,000 + 10,95,000 + 9,45,000 + 7,95,000 = 33,30,000 Average PAT = 33,30,000 / 4 = 8,32,500 Average Investment = (₹ 24,00,000 +2,40,000) / 2 = 13,20,000 Or, Average Investment = 1/2 (Initial Investment – Salvage Value) + Salvage Value = 1/2 (₹ 24,00,000 -2,40,000) +2,40,000 = 13,20,000 ARR = (8,32,500 / 13,20,000) × 100 = 63.068% or 63.07% (ii) Calculation of WACC WACC = (0.80 x 13.5%) + {0.20 x 8% (1 - 0.25)} = 10.8% + 1.2% = 12% Statement of Cash Flows after Tax Particulars Year 1 (₹) Year 2 (₹) Year 3 (₹) Year 4 (₹) Year 4 (₹) Profit after tax (PAT) 4,95,000 10,95,000 9,45,000 7,95,000 Add: Depreciation 5,40,000 5,40,000 5,40,000 5,40,000 Cash Flow after Tax (CFAT) 10,35,000 16,35,000 14,85,000 13,35,000 2,40,000 (Salvage Value) PV Factor @12% 0.893 0.797 0.712 0.636 0.636 PV 9,24,255 13,03,095 10,57,320 8,49,060 1,52,640 Total PV of Inflows = 42,86,370 NPV = PV of Inflows - Initial Investment = 42,86,370 – 24,00,000 = 18,86,370